[The supreme commanders of the four powers on June 5, 1945 in Berlin: (from left) Bernard Montgomery, Dwight D. Eisenhower, Georgy Zhukov, and Jean de Lattre de Tassigny. By December 1944, it was clear that the German war machinery was broken. So, Eisenhower decided to pull his strongest resources into reaching Berlin before the Soviets so that the post-war structure of Europe could be determined by the Anglo-Americans.

Photograph by: Bundesarchiv, Bild 183-14059-0018 under Creative Commons]

The last quarter of every year is epochal for two reasons: one, everyone believes that the world is coming to an end on March 31 and the budgeted numbers that could not be met in the preceding nine months have to “somehow be done” in the remaining 90 days. Two, a fever to make next year’s save-the-world agenda takes hold of us. This is a period characterised by mindless obsession with numbers. I ask you, to borrow from Dhanush’s popular song, “Why this Kolaveri di (murderous rage)?”

We hurtle into this mechanical madness without taking any time to step back and reflect: what is the purpose of this ritual called budgeting? Is it merely to cast numbers and targets for the year, or ought it to be seen as an opportunity to review and put in place an operational plan for the larger strategic intent?

Since almost everything we call modern management practice has been adapted from the practices of the armed forces, I am going to lean on military history to illustrate the true nature and multiple dimensions of budgeting.

How focus on winning a battle cost Germans the war

During the winter of 1944, the now famous Battle of the Bulge, codenamed Operation Watch on the Rhine by the Germans, unfolded in the Ardennes region spread across Luxembourg, Belgium and France. This major German offensive ended with about 200,000 casualties—two-thirds of them from the German forces and the rest predominantly from the American forces.

It appears that Hitler wanted to relieve the pressure arising from the Allies’ dash to Berlin after they had run over France, post Normandy in June 1944. He believed that if he mounted an all-out attack on the weak Allied lines in the Ardennes region and punched through to the Belgian ports, mainly Antwerp, and cut off the Anglo-American forces to the north, he would have a stronger hand during the armistice negotiations.

Some military historians believe that Hitler was delusional in believing that if he won the Ardennes battle and took Antwerp, he could declare the war a stalemate and not a loss for the Third Reich. Germany was being squeezed on the eastern front by the rampaging Soviets and on the west by the Anglo-American forces. Even his own generals were not sure how realistic any of these objectives were.

However, Hitler was driven largely by personal ambition and not the national strategic objectives. As with many self-obsessed leaders, the distinction between the two had long become obfuscated. Hitler at this stage of his life would harangue his veteran generals that it was “Primacy of Will” that made impossible dreams become real, that the impossible could be achieved through the energies generated on one’s own side.

The supreme Allied commander General Dwight “Ike” Eisenhower’s son, General John Eisenhower, recounts the battle in his book The Bitter Woods: The Battle of the Bulge and surmises that belief, devoid of reason, takes charge of an individual’s judgment when ambition, which is not tempered by counsel from others, drives one’s pursuits. He believes that this attitude makes one overestimate the infallibility of one’s own information and judgment and reject all contrarian information and judgments.

When his generals advised digging in and defending at the German borders rather than stretching the lines in an all-out attack, Hitler concluded that they were being defeatist. He disregarded the ground realities, the capacity and capability of the resources at his command, the superiority of the Allied forces, or the fact that Germany was fighting on two fronts.

Pretty sane leaders have erred the same way that Hitler did in believing that “never defend, never withdraw and only attack” is inspirational. Thus, we see “Primacy of Will” all around us, especially with larger-than-life leaders.

By this time Hitler had no air power; the Luftwaffe had been blown out of the skies during the preceding six months. In an all-out gamble, he committed even his reserve forces to Ardennes—all the armour and battle-hardened infantry that had been kept back to fight a defensive battle inside Germany. All that remained as reserve force were 14-year-old untrained children, the Hitler Youth.

[Hitler put all his resources into fighting the Battle of the Bulge, leaving only the Hitler Youth to defend German borders. Ground realities indicated he needed to hold off the Allies at the borders to gain better bargaining power in armistice negotiations.]

Even a new student of military strategy will understand the importance of the reserve force. It steps in to hold the conquered territory. It keeps the fuel, ammunition and medical supply lines open for the attacking forces (all the more pertinent for Germany because with the Luftwaffe decimated, supplies could not have been air dropped). It replenishes the loss in infantry, armour and artillery. Above all, at the decisive moment in battle, it becomes the force multiplier.

Any rapidly moving attack force is vulnerable when there is no force to commit to cover the rear and at least one flank—in this case the all-important southern flank.

If the gamble in Ardennes failed, the German mainland was indefensible, with no force or equipment left to fight a defensive battle to keep the Soviets (on the eastern front) and the Anglo-American forces (on the western front) long enough at the German borders. Only a long battle of attrition on the borders would have given Hitler enough room to negotiate an armistice treaty to protect the sovereignty of the German Fatherland despite losing the war.

Sight on the main objective

Contrast this with Eisenhower’s moves.

The strategic objective of the Anglo-American forces was to end the European war quickly and get to Berlin before their allies, the Soviets, got there, so that the post-war shape and structure of Europe could be determined by the Anglo-Americans.

By this time it was evident that the back of the German war machinery had been broken.

Hence Eisenhower’s focus was the roads to Berlin and not Ardennes. He knew that the loss of Ardennes may delay the end of the war but was unlikely to damage the core strategic objectives of ending the European war and taking Berlin before the Russians took it. So, Eisenhower put heavy resources into the attack forces moving to Berlin and left the forces at Ardennes with lighter resources to fight a defensive battle should the need arise.

Thus, Hitler was correct in his assumption that the Ardennes and the Flemish region were thinly resourced. However, the central point is, what really was Hitler’s strategic objective and how did an all-out attack in Ardennes support it? Was he fighting to win the war, manoeuvre a strategic negotiating advantage or was it meant to delay the impending Allied push into Germany—and if so, for what purpose? Clarity on this alone would have helped his staff officers set the battle plans with any degree of confidence.

History tells us the meticulous planning Hitler’s staff officers did for the Battle of the Bulge. In contrast, the Allies had only a vague inkling that Hitler may attack in the Ardennes. So on December 16, 1944, when the Germans attacked, the Americans were caught with their proverbial pants down.

Yet in three weeks’ time the Germans would be in headlong retreat, with their forces in complete disarray and having lost men and machinery that would have been vital for defending the fatherland. Hundred days later Berlin fell, the war was over and Hitler was dead.

Your budget is not an end in itself, but a stepping stone

What are the key lessons from the Battle of the Bulge for us in business?

To start with, let us remind ourselves that what we call business planning is, in fact, the budgeting process. Over the years, budgets have come to represent targets. However, in reality, a budget deconstructs the strategy into executable actions. In that sense it is the operational plan for a given strategy. It largely deals with allocating resources to effectively execute the operational plan. As CK Prahalad wrote, it is also a plan to leverage resources—depending on your strategic objective, where do you need to attack and therefore deploy more? Where will you defend and can do with less?

In business, the thumb rule is, new product launches and markets you want to wrest from competition demand resource superiority. Established, mature markets can be milked with much thinner resourcing. How often do you see budgets making this distinction in resource allocation?

No strategy can dictate only attack on all fronts, with no defensive lines or options to withdraw. If a business leader adopts an attack-only approach, he will face the same consequences that Hitler faced with his approach in Ardennes. A caveat here: no one can really have a plan for withdrawal; it is a flexibility that leaders give their field commanders, lest they foolishly decimate valuable resources.

How much and how long do I commit resources where the result is a foregone conclusion? Can I redeploy a resource to where it will alter the balance of power and the eventual result?

Hence, the obsession that once a budget is set it is sacrosanct, is akin to Hitler’s “withdrawal is superfluous” doctrine. There ought to be room to modify a budget if there is a shift in economic realities or if market conditions for a particular business line or a product have changed. Thus, withdrawal of resources or shifting from an attack strategy to a dig-in and defend strategy or vice versa has to be part of operational planning.

Blind budgeting and the 2008 crisis

Banks before 2008 went on an all-out attack on all fronts, leading to mounting losses that eroded their capital base. It is wrong to think that only the misadventure into credit derivatives caused the crisis—that was just the last straw on the camel’s back. Pause for a moment and ask what kind of budgeting permitted growing a single product called credit derivatives to such proportions? How can someone budget for this product to grow so much without first developing a deep understanding of what it is? Also ask, what kind of budgeting could have found the capital to backstop the fallout when the world of credit derivatives collapsed?

Let me illustrate with how JP Morgan Chase handled it: After an initial foray into mortgage-backed credit derivatives, the bank pulled back because it concluded that it did not understand the product or the market dynamics. The capital that it did not eventually blow up on credit derivatives helped it win big on other products. Thus, budgets flow from strategic choices and are not number-balancing games. It appears that JPMorgan’s chief executive Jamie Dimon did not believe in the Primacy of Will.

The moral of the stories is, when you budget for something you do not understand and take the result for granted, the budget counts for nothing. Hitler made this mistake at Ardennes and the banks in 2008.

We spend inordinate time and effort in casting numbers without understanding that this may commit us to resourcing that we did not bargain for.

The little pieces that make up the final picture

The budgeting outcome should answer the question, how will an operational plan and resource allocation best achieve the strategic objectives? It has to be dynamic. It has to be specific to the business line, product and market, and not based on any one doctrine. The growth-obsessed leaders are in a way doctrinal in their approach.

I often wonder: if strategy is for a time frame that is more than one year, how can an organisation’s budget be for one year? Would not a year-to-year budgeting process be disjointed and out of tune with the big picture called strategy? Markets, customers and competition do not change between March 31 and April 1. Is it not strange that we think of budgets in terms of discrete fiscal years and not as a strategy cycle aligned to the number of years for which we may have framed our strategy?

Hitler did not have a final picture of what would signify to him the achievement of his strategy. So he went from one battle to another. However, the Allies were clear about their strategy—the liberation of Europe in the western theatre by pushing back the Germans and the liberation of Asia Pacific in the eastern theatre by pushing back the Japanese.

When the limits of our strategy are unknown to us, very often the planning process becomes the casualty. We call this expansionist strategy. It is impossible for any planner to plan an expansionist strategy not framed in a timeline. Occasional opportunism pays, but the strategy itself cannot be opportunistic. This makes resource planning almost impossible, which is the key to acquiring appropriate capacity and capability to execute the operational plan. Building resource capacity and capability has a lead time, no matter how efficient the institution is. Eisenhower negotiated with American President Franklin Roosevelt and British Prime Minister Winston Churchill, a full 18 months’ time to build capacity and capability for the main European invasion.

During the past 10 years, many Indian businesses pursued an expansionist strategy without knowing their limits; they overreached and found themselves overwhelmed in terms of resources which include people, funding, innovation, access to market and access to and assimilation of technology.

This is what Prahalad pointed out as the risk in going beyond the core competency. You may disagree with him, but ask yourself: is going to Europe to build a steel business wise, when you have not yet achieved global-standard capacity or capability at home? How much leverage of capital is sound when you are venturing into unknown new businesses, where you have no proven proprietary capabilities? Spreadsheets cannot deliver the intended value of acquisitions and mergers.

Where the budgeting process is a formalisation of the CEO’s personal aspiration and not a well-tested output aligned to the institutional strategy, it is doomed to go the way the Battle of Ardennes went for the Germans.

A process of consultation and critique by informed team members is the best way to test any proposition. When CEOs refuse to do this and impose their propositions on institutions, the staff officers will cast great operational plans that look as sound as the plan for the Ardennes offensive, but the result will not be any different. The unfolding saga of Vijay Mallya is a case in point. Sir Charles Miller Smith, the CEO of British chemicals firm ICI Plc, is another case in point. He wanted ICI to become a packaged consumer goods company because he could not become the CEO of Unilever Plc. In the mid-1990s he went on a shopping binge in an attempt to move away from the commodity chemicals business. In the process, the company took on a lot of debt and weakened its profitable core. ICI Plc is long dead and gone.

Equally, where a CEO converts the budgeting process to bilateral negotiation or a browbeating exercise with individual business leaders, without a broad-based acceptance from the other colleagues in the team, it is unlikely to be aligned to the overall organisational strategy. In this scenario it is impossible to leverage resources—the core aspect of budgeting—in a sensible manner.

Eisenhower always had his key generals together when he planned a battle, irrespective of whether they were involved in the battle or not. He believed this balanced out the blind spots each may have had and also prevented an attack-only or defend-only general from running away with his default approach. Yet he always gave the final word to the general who would command a particular battle. No doubt this brought out many serious conflicts between his generals. But this did not deter Ike from conferring with all of them in one room. He had consummate ability to manage their egos and the many conflicts without any danger to the conduct of the war or his relationship with each one of them.

The key takeaways

So then, the budgeting lessons from the Battle of the Bulge:

• A budget is only as good as its alignment to the strategy. Budgets are operational plans and not mere targets and numbers.

• You do not plan a battle at a time; you plan the war and place the battles within the strategic objectives of the war. Budgets have to cover the entire period of the strategy and not be a year-to-year compartmentalised and incremental process.

• Operational plans and hence budgets cannot be a static arrangement of numbers cast in stone. They have to be dynamic and open to all options. In fact, numbers do not qualify as budgets; it is only a succinct representation of the expectations from an operational plan.

• A budget counts for nothing when you budget for something you do not understand or when you don’t have capability to achieve it, or when you take the results for granted.

• When personal ambitions do not get challenged in the boardroom, iconic leaders can unwittingly run amok. This may lead to these leaders using the institution and its resources to further their own ambition, often putting the institution in peril.

• Any planning process that does not focus on capacity and capability planning in order to leverage resources, is doomed from the start. Further, resource allocation cannot be a democratic process or an incentive to get a business leader to accept your plan. It has to be a hard-nosed plan determined by the strategy.

• Finally, it is impossible to build capacity and capability for an operational plan that is rooted in an expansionist strategy not placed within a realistic time frame. No expansionist strategy can work without a strong reserve capacity and capability.

So for next year, see if there’s a new way to think about how you lead the budgeting process inside your own enterprise. Perhaps you could tell your colleagues this time-tested story of the Battle of the Bulge. That way, your entire leadership team could develop a shared understanding of why even a seemingly mundane process of budgeting could help you achieve your collective ambitions.

Disclaimer: This article was originally published on March 8th, 2016, at FoundingFuel. To read it there, kindly click here.